Market News and Analysis

For forex traders trading on GBPUSD, two major market-moving events take place within a week of each other this month. The Federal Reserve will announce its decision on interest rates on June 15th, while Britons vote in a crucial referendum on the 23rd.

The Fed is considering its first interest rate rise since December, when a quarter point hike sent global markets into a spin. Markets appear calmer this time but a tantrum cannot be ruled out, especially with Britain’s referendum on EU membership taking place eight days later.

Traders need to be prepared for four possible scenarios for GBPUSD and the (likely) volatility:

Most volatile - Fed hikes, Britain Leaves

Volatile – Fed sticks, Britain leaves

Volatile – Fed hikes, Britain stays in EU

Least volatile – Fed sticks, Britain stays in EU

Expectations of higher US rates tend to drive demand for the US dollar, while expectations that Britain could leave the EU has driven down the pound. A vote to leave the EU coming just after the Fed raising rates could be a perfect storm for GBPUSD.

Therefore, in terms of positioning, what matters most to traders may well be the odds of the Fed moving on rates and the odds on a Brexit.

Odds of a Brexit

The odds of Britain leaving the EU lengthened towards the end of May, as a poll in the Telegraph suggested strong support for the Remain side. The newspaper’s survey said Conservative voters, pensioners and men have turned against Brexit and now want to stay in the EU. Overall, the poll had the Leave camp trailing 13 points behind Remain.

Following the release of the data, GBPUSD rallied strongly, indicating how the pair is sensitive to Brexit expectations. Sterling touched its best level in three months as investors reacted to the poll.

The first two months of 2016 saw the pound slide to its weakest in seven years, declining more than 6% as Brexit momentum gathered pace. But sterling has since recovered more than 5% as the balance shifted back towards the pro-EU side.

For trading GBPUSD ahead of the referendum, it looks like polling data may have the biggest impact on sterling strength.

Odds of a Fed Rate Hike

Polls can also tell us about the chances of the Fed raising rates in June – but ultimately the decision is down to the individual policymakers and their view on the day.

Minutes from the April meeting indicate that June is a live meeting. “It likely would be appropriate for the Committee to increase the target range for the federal funds rate in June” if the economic data supports, the minutes read.

By the end of May, Federal funds futures trading suggested a one in three chance of the bank raising rates in June. Meanwhile, several Fed officials have been talking up the June meeting.

Stellar US new homes sales figures made a rate hike this summer much more likely but July looks like a less risky prospect for the Fed than June. St Louis Fed president James Bullard has pointed out that the bank does not have to hold a press conference alongside a rate hike, which is a sign there is nothing to stop the bank waiting until July to pull the trigger. Governor Jerome Powell has said markets should expect a rate rise pretty soon.

Minutes from the last Fed meeting also pointed to the risks to financial markets from the Brexit vote. The question is whether the central bank is prepared to hike with the British referendum so soon after.

Added market volatility means increased opportunity but also more risk. To reflect this, ETX Capital may be increasing margin rates on certain markets.

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